AP Macro Unit 2 Pt 1

private sector

part of the economy that is run by individuals and buisnesses

public sector

part of the economy that is run by the gov’t

factor payments

payment for the factors of production (rent, wages, interest, and profit)

transfer payments

when gov’t redistributes income (welfare, social security)

subsides

gov’t payments to buisnesses

3 macro goals every country has

1- promote economic growth

2- limit unemployment

3- keep prices stable (limit inflation)

national income accounting

economists collect statistics on production, income, investment, and savings

gross domestic product (GDP)

dollar value of all final g/s produced within a country in one yr

dollar value

GDP is measured in dollars

final goods

GDP only counts NEW goods and services

w/in a country

GDP measures production w/in the country’s borders

1 yr

GDP measures annual economic performance

how to use GDP

1- compare to previous yrs (is there growth?)

2- compare policy changes (did a new policy work?)

3- compare to other countries (are we better off?)

formula for measuring growth from yr to yr

% change in GDP = [(yr 2-yr 1)/yr 1]x100

GDP ___________ is the best measure of a nation’s standard of living

per capita

economic system

capitalism promotes innovation and provides incentives to improve productivity

rule of law

countries with solid institutions and political stability have historically had more econ. growth

capital stock

countries that have more machines and tools are more productive

human capital

countries that have better education and training are more productive

natural resources

countries that have access to more natural resources are more productive

productivity

output per unit of input

NOT included in GDP

1- intermediate goods: goods inside final goods

2- non production transactions: financial transactions (nothing produced)

3- non market and illegal activities: things made at home: household production

3 ways of calculating GDP

1- expenditures approach: add up all the spending on final g/s produced in a given yr

2- income approach: add up all the income earned from selling all final g/s produced in a given yr

3- value-added approach: add up the dollar value at each stage of the production process

income approach

1- labor income: wages earned from preforming work

2- rental income: income earned from property owned by individuals

3- interest income: interest earned from loaning money to businesses

4- profit: money businesses have after paying all their costs

expenditures approach

1- consumer spending (C): purchases of final g/s by individuals

2- business investment (I): businesses spending on tools and equipment

3- gov’t spending (G): schools, roads, tanks

4- net exports: exports (X) - imports (M)

GDP formula for expenditures approach

GDP(Y) = C + I + G + (X-M)

3 components of consumer spending

1- durable goods

2- non-durable goods

3- services

investment

NEVER when individuals buy assets like stocks and bonds

ALWAYS when businesses buy capital like machines, resources, and tools

is production of a new home C or I?

I b/c can be rented out

inventories

goods produced and held in storage in anticipation of later sales

counted in yr produced, not sold

change in this is a valuable economic indicator

gov’t expenditure

tracks the spending made in the ‘‘public sector’’

includes payments made by the gov’t for g/s

NOT include money spent on transfer payments like welfare, ss, and subsidies and interest payments on national debt

non market transactions

many g/s provide value, but don’t count in GDP

unemployment

workers that are actively looking for a job but aren’t working

unemployment rate

% of ppl in labor force who want a job but aren’t working

formula for unemployment rate

(# unemployed/# in labor force) x100

ppl in labor force

@ least 16 yrs old

able and willing to work

not institutionalized

not in military, school full time, or retired

4 types of unemployment

1- frictional

2- structural

3- cyclical

4- natural rate of unemployment (NRU)

frictional unemployment

temp. unemployment or being b/w jobs

individuals are qualified workers w/ transferable skills

seasonal unemployment

specific type of frictional unemployment, which is due to time of yr and nature of the job

structural unemployment

changes in labor force make some skills obsolete

these workers do NOT have transferable skills and these jobs will never come back; must learn new skills to get a job

permanent loss of these jobs is called ‘‘creative destruction’’

technological unemployment

type of structural unemployment where automation and machinery replace workers

cyclical unemployment

unemployment caused by a recession

as demand falls for g/s, demand for labor falls and workers are laid off

sometimes called “demand deficient unemployment”

natural rate of unemployment (NRU)

frictional and structural unemployment are present at all times b/c some ppl will always be b/w jobs or replaced by tech

if econ. is doing great if there is only frictional and structural unemployment

frictional + structural unemployment; amt of unemployment that exists when econ. is healthy and growing

full employment output (Y)

real GDP created when there is no cyclical unemployment

difference b/w NRU and non-accelerating inflation rate of unemployment (NAIRU)

both represent idea of full unemployment

NRU focuses on output and not having too much unemployment

NAIRU focuses on inflation and not having too little unemployment

low unemployment

too little unemployment can cause prices to rise since consumers spend more and producers bid up the price of resources

non-accelerating

a low unemployment that doesn’t cause higher prices

the unemployment rate can misdiagnose the actual unemployment rate because of…

1- discouraged workers

2- underemployed workers

3- race/age inequalities

discouraged workers

some ppl are no longer looking for a job b/c they have given up

underemployed workers

someone who wants more hours but can’t get them is still considered employed

race/age inequalities

the overall unemployment rate doesn’t show disparity for minorities and teens

labor force participation rate

% of pop in the labor force

if ppl leave labor force the unemployment rate falls

(labor force/ppl over 16) x100